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Shariah funds gather assets in Malaysia

Assets of shariah-compliant funds in Asia continue to grow, driven by the markets of Malaysia and Indonesia, according to a report by Boston-based research firm Cerulli Associates.

Malaysia continues to be the leader in the region, with shariah mutual fund assets increasing 20% to $28.4bn for the full year 2017, according to the report. Net new flows were $4bn during the year, which compares to $2.3bn in 2016.

Shariah-compliant funds are invested in line with basic Islamic principles. For example, no stocks may derive income from gambling, alcohol, tobacco, pork products, adult entertainment or military equipment. The principles also restrict the use of some mainstream financial instruments such as debt-financing, charging interest or the use of derivatives.

Globally, Malaysia is the second largest domicile for Islamic funds after Saudi Arabia, accounting for 29% of the total industry in 2016, according to the report.

The distant third largest market is Indonesia, where total shariah mutual fund assets increased 90% to about $2bn in 2017.

Elsewhere in the region, Singapore has also grown its shariah fund market by 10% during the same period, but assets remain small at $382.2m. In the Lion City, shariah funds are considered niche products that private banks, wealth managers and independent financial advisors offer, the report said.

In Thailand, shariah fund AUM stood at $22.8m, according to the report, noting that the segment is not a priority for many fund managers and distributors.

Regulatory driven

In Malaysia, the shariah fund market has two drivers, the financial regulator and institutional investors.

Last year, Malaysia’s Securities Commission launched a five-year Islamic and wealth management blueprint to promote international Islamic finance in the local market. One of the recommendations is the creation of an investment fund for local multi-currency, shariah-compliant products, according to the Cerulli report.

Various firms rolled out shariah funds following the launch of the blueprint. They include Manulife Asset Management’s Investment Shariah Progress Plus Fund, an APAC-focused fund, Affin Hwang Asset Management’s commodity-based shariah ETF, the Tradeplus Shariah Gold Tracker, and I-Vcap Management’s ETF that tracks the biggest shariah-compliant companies in the US.

However, the demand for such products in Malaysia are mostly driven by institutional investors, Kianhong Tan, Singapore-based senior analyst at Cerulli, told FSA.

“Even though numbers showed how shariah unit trust and wholesale funds’ AUM increased in 2017, partly due to good returns in Malaysia shariah securities, sources on the ground still maintain that retail investors’ primary concern is with investment returns,” he said.

In Malaysia, state pension funds, such as the Employees Provident Fund (EPF) and the Kumpulan Wang Persaraan (KWAP), have played major roles in developing the shariah asset management industry, according to the report.

For example, without giving a timeline, KWAP aims to be 100% shariah-compliant once there is enough maturity in the Islamic market, the report said. In early 2017, shariah investments accounted for 55% of its assets.

Indonesia’s new regulations

In Indonesia, the shariah mutual fund market has benefited from new regulations, according to the report.

In 2015, the country’s financial regulator lifted the 15% limit on overseas investments of shariah funds, which paved the way for the launch of nine foreign-invested funds in 2017. The funds saw their total AUM soar to IDR 7.8trn ($546m) in 2017 from IDR 945.2bn in 2016, according to the report.

Last year, new regulations were also introduced. The financial services authority lowered the paid-up capital requirements for new shariah asset management firms.

“[However], the market remains small and has few strategies to offer institutional investors, which outsource assets mostly through mutual funds. This is one of the reasons institutions in Indonesia have little shariah-compliant investment,” the report said.

For example, pension funds BPJS Ketenagakerjaan and Asabri had less than 5% of their total mutual fund holdings invested in shariah funds as of the end of 2017, according to the report.

Turning to the retail segment, some Indonesian fund managers said that selling agents are not marketing shariah products aggressively as they believe there is limited appetite for these funds, the report said.

Nevertheless, global shariah funds selling in Indonesia had strong inflows in 2017. Manulife AM’s Saham Syariah Asia Pasifik Dollar AS alone recorded inflows of IDR 4.4trn for the year.

“Fund managers with strong returns on their funds seem to do well in this space. Having a large agency distribution network that targets a mix of high net worth and retail investors also helps attract sales,” the report said.

Part of the Bonhill Group.